Durbin Exemption Fails to Protect Credit Unions From Impact

Roughly fifteen months after the Durbin amendment went into effect, the controversial legislation that capped debit card interchange for issuers with over $10 billion in assets has painted a mixed picture for most credit unions.

In the shadowed part of the picture, interchange rates per debit card transaction appear to be definitely falling, according to payment processor and CUSO executives who track debit trends. In the lighter part of the image, overall debit interchange income has not fallen as much or has actually risen as credit unions added more debit cards or enacted programs to hike debit card usage.

But the executives maintain that despite that lighter side, the overall debit interchange picture remains darker than they would like because at some point credit unions will reach the limit of the number of new cards they can issue or the number of times their members can use the cards while the debit interchange rates will remain capped and other market changes the amendment mandated that the executives said hurt credit union interchange income will remain in place.

None of the processor and CUSO executives interviewed for this story claimed to have scientifically surveyed credit unions for their debit interchange data, but all said their organizations had begun working with credit unions to both evaluate and improve their debit interchange numbers and preserve what they consider a vital part of credit union noninterest income.

Even though all but four credit unions in the country have less than $10 billion in assets and were supposed to be exempt from the Durbin amendment’s cap, all the executives interviewed reported that credit union debit card interchange has taken a loss on a per transaction basis.

Even though it is not scientific, the organization with the most systematic data about debit interchange performance in the wake of the Durbin amendment is CUNA, which has been inviting member credit unions to voluntarily submit information about their debit interchange in the months since the regulations were promulgated.

CUNA reported data from 155 credit unions and looked at the data across four time periods. The nine months from December 2010 to September 2011 provided a baseline for comparison. The six months from September 2011 to March 2012 provided data from the regulation’s initial implementation. And the association collected data from March to June 2012 and from June to September 2012, which represented debit interchange under the regulation’s full implementation.

“We wanted to see if changes we found represented a one-time event or an ongoing series of changes and for that we needed quarterly data,” said CUNA Chief Economist Bill Hampel.

Essentially, the data suggested that interchange from transactions debit card users validate with their signatures may have stabilized. Signature validated debit transactions generated 1.32% of the transaction value in each of the two most recent quarters for which CUNA collected data after having peaked at 1.40% of transaction value in September 2011, the month right before the regulation went into effect.

In monetary terms, that means each debit transaction validated with a signature brought in between 44 cents and 45 cents in the last quarters where data was collected, compared to between 46 cents and 47 cents in September 2011.

The same cannot be said about interchange from debit transactions that consumers validate with a personal identification number. This interchange has dropped from a peak of roughly 0.70% in September 2011 to 0.64% in the last quarter surveyed. In monetary terms, this means interchange from each debit transaction that a cardholder validated with PIN moved from 29.8 cents per transaction in September 2011 to 27.6 cents in the last data collection period.

Hampel acknowledged that the numbers here are very small on a per transaction level, but spread over an entirely portfolio’s transactions, they can really add up. For PIN debit transaction interchange, for example, the surveyed credit unions moved from making $27.21 million for their debit transactions in September 2011 to $26.26 million in September 2012, even though the numbers of debit cards for the surveyed credit unions climbed by over 600,000 across the same period.

“What we don’t know,” Hampel said, “is whether this represents a one-time shift as the regulation is put into effect or whether it’s an ongoing trend. If it’s a one-time effect, it still hurts credit unions but if the interchange level stabilized credit unions can probably manage it to pay for their debit programs. If it’s an ongoing trend, they may need to make changes.”

Bill Lehman, CSCU’s vice president for portfolio consulting, said the association of credit unions which process their payment transactions with FIS had seen similar numbers from the credit union clients whose programs they were seeking to improve.

“It’s like what we said when we were looking at Durbin’s impact [before the regulation came into affect],” Lehman said. “It’s possible to be exempted from the law but not exempted from the market.”

Lehman meant that not only the cap but also the changes in how PIN debit transactions are routed have so changed the overall market for PIN debit services that an interchange decline was inevitable. Being exempt from the actual cap means nothing, he argued, if the entire interchange scale was forced to drop. He also noted the irony that generating more debit transactions was becoming the priority of both retailers and issuers again. Prior to the fights over interchange, both retailers and issuers sought to increase the use of debit cards at the expense of cash and checks. Now, it appears that priority may be coming back into vogue for both communities. Retailers still want the expanded customer base, higher per transaction spend and greater safety and efficiency that debit cards represent and issuers want more debit transactions to keep up their interchange income.

Lehman and other executives noted that increased volume was also actually helping to shield credit unions from the overall impact of the interchange drop. For example, on a per transaction basis, overall debit income which included both PIN and signature validated transactions, dropped by 1.9% and 2.5% in each of the final two quarters CUNA covered in its survey, but overall debit income from both transaction types actually rose by 3.4% in the quarter ending June 2012 and fell by only 1.9% over the quarter ending September 2012.

“I think it’s clear that increased numbers of cards and increased debit transaction volume are effectively masking the impact of an interchange drop,” observed Stan Hollen, CEO of CO-OP Financial Services, which processes debit transactions for roughly 800 credit unions and whose credit union clients have seen between an 8%-10% drop in interchange income on a per transaction basis. “The only question is how long they can do that.”